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Mark's Market Blog

12-7-14: A day that shall live in infamy?

By Mark Lawrence

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Stocks got a bit overbought and had a little mini-correction on Monday, but recovered quickly and made a couple new all-time highs later in the week. Party on, Dudes! We had a bit of trouble pushing through the S&P 2040 level a week ago; now it seems we're having the same problem pushing through the 2080 level. The next problem area is in the 2100-2150 area, we can expect to get stuck in there for several days. I've been saying 2150 is my next expectation; currently I think there's a very decent chance we'll hit that before the end of the year.

S&P 500 June 15 2014 to December 5 2014

How's the market doing? Lotsa people on Wall Street are nervous about an upcoming crash. I'm not - there's simply too much money floating around and there's no triggering event like war or recession or something else big and newsey. To the contrary, the November jobs report was excellent with 321,000 new jobs added - 50 straight months of adding jobs, and the number seems to be accelerating. It's very normal for everyone to be nervous - "Bull markets climb a wall of worry." When they stop worrying, that's when to get nervous. Anyway, stock valuations as a percentage of GDP, Warren Buffet's favorite measure to see if stocks are cheap or expensive, is nearing an all time high. Crash confidence, which is a trailing indicator meaning everyone thinks there will be a crash right after one starts, is dropping, not rising. We're due for a Christmas stock price run-up, for an end-of-year run-up, and for a presidential 3rd year run up. Basically I think it all looks more or less like smooth sailing right now. Putin can change that overnight, but Russians are never in a big hurry to attack in the winter. The Fed could change it too, but they're also in no hurry to turn off the lights and shut the party down. Noriel Rubini aka Dr.Doom called this bubble back in February of 2013. He says it won't pop until 2016.

What is Amazon doing to the retail world? Amazon has huge automated warehouses all over the world now. Products are on shelve units in no visible arrangement - computers keep track of what products are on what shelves, so razors can be next to comic books next to vitamins. When you order something one of Amazon's 15,000 robots drives out, picks up a shelf unit with your product and brings it to a boxing table for a human. When the human is done the robot brings the shelf back to an empty slot as directed by the warehouse computer, likely a different slot than it came from originally. People pretty much never walk down the isles. As other companies work to catch up they're having problems matching this efficiency. Kohls says its online profitability is half that in its stores; Target says its margins will shrink as online sales grow. Walmart says it will make no money on online sales through 2016 as they build technology and infrastructure to match Amazon. And smaller companies who can't match the technology and warehouse investment? Forget it, they're going to have to shrink into a niche or go the way of the dinosaurs. Perhaps on-line sales will do what junk mail couldn't: save the post office from their exorbitant retirement costs.

Oil continues to hover in the mid-60s. The gas station OnCue in Oklahoma City became the first gas station in the US to drop the price of regular below $2 since 2010. Which promptly lit off a gas war. Remember those? It's yesterday once more. . .

Best Buy, struggling to survive in the US due to internet pricing and sales of electronics, is quitting China. They had 184 stores in China, but they're all sold now.

Newspapers are dead - no one under about 35 even knows how to hold one. Broadcast TV may be next on the block. TV advertising revenues fell 9% this year. Digital advertising grew 11% in the same period.

Manufacturing is returning to the US. As Chinese labor prices continue to rise, along side existing chinese quality problems and the cost of shipping across the ocean, many companies are finding it more cost effective to use american labor. For example, Mexican drug cartels are now illegally bringing US marijuana into Mexico, where local growers cannot match US potency and quality.

The Chinese stock market is looking so much like a bubble these days that even the Chinese government has issued a warning to "fear the market."

It's the month of the 120s. The Euro is at about $1.25 and headed down; many forecast $1.20 by Christmas and then $1.10 a bit after that. The Euro is also at Swiss Franc 1.20 and headed down, even though the head of the Swiss central bank is committed to using "unlimited" resources to prevent this. We may soon learn what "unlimited" means - when supporting the Swiss Franc means buying €250 billion, will they write the check? And finally the Japanese yen is at 120 to the dollar and on the way down. This will likely pause for a couple weeks due to the snap elections on December 14th, but after that we're most likely on our way to ¥140. This is going to cause no small amount of consternation in China and Korea. We're having a bit of a pause in Ukraine hostilities due to winter, so it appears the currency wars will heat up to take its place. Nouriel Roubini, professor at New York University, said, "Domestic demand is weak in advanced economies, and the only way to grow the economy is to weaken currency in order to boost net exports." Because trade balance is a zero sum game countries have to compete for a larger share of the market by continuing to lower their currencies. Roubini predicts that Japan's increase in QE will lead to a full-out currency war, "From Korea to Malaysia to Thailand. . . even the Central Bank of China has recently cut rates to avoid the strengthening of its currency." The contagion of lowering currency value will hit Europe next, says Roubini. "The first to be hurt by a weak yen [will be] Germany and the Eurozone so the ECB will have to do quantitative easing. The Swiss National Bank, the Norwegians and the Central Europeans" will have to follow.

There's a plant native to Indonesia, "gendarussa." The leaves look a bit like marijuana. When you make pills from the leaves, they form a male birth control pill that's 99% effective. The pill weakens enzymes in the sperm that make them wigglers, so unlike women's birth control pills it doesn't mess with men's hormones at all. It can take up to 30 days for the pill's effects to completely wear off. I'm big on this, as currently women have 100% control of everything regarding birth - they decide if they're getting pregnant, if they're getting an abortion, and implicitly if the male is on the hook for 18 years of support payments. Now we get a choice. Of course it will have to go through US clinical trials before it's released in the US, which take ten years and cost well north of a billion dollars. Not to worry, it will likely be available soon on EBay from a Thailand supplier as an anti-biotic for your fish tank or something like that. I'd like to see this put into the water supplies of the fastest growing populations in Africa and India.

Europe's PMIs just came out and economic growth continues to be stalled, perhaps .1% in the 4th quarter. France is already in recession with a PMI of 48 and unemployment rising to record levels. S&P just cut Italy's bonds to one notch above junk after 13 straight quarters of negative growth. Due in part to the falling price of oil, markets are now pricing in deflation for Europe in 2015. This will almost certainly lead to more QE next year, 'cause, you know, if you already have negative interest rates and that's not doing it, then it's definitely time to print yet more money. You have to give the central bankers credit for having the courage of their convictions - their stuff hasn't worked for years, but that doesn't even slow them down. Most European countries want to engage in a new round of deficit spending, which is against EU rules that say your budget deficit cannot exceed 3%. Germany is adamant that other countries must play by the agreed-upon rules and more deficits will not be tolerated, making Germany the unpopular father at this proposed teen-age girl credit card spending spree. Below is the new European Central Bank building in Frankfurt Germany, appropriately placed immediately behind the Sudfass whorehouse (partially dismantled for expansion work - those bankers like their hobbies).

Russia, of course, is crashing into recession as oil profits evaporate, their currency hits record lows, employment drops and import prices skyrocket. Current credit default swaps on Russian bonds are pricing in a 23% chance of a Russian default. I don't understand why we want to harm Russia - I can only imagine it's become a personal thing with Obama.

Back in April, Japan raised their national sales tax. They estimated this would cost them .5% growth rate. Now the numbers are in and it seems it cost them 1.9%, putting them into two consecutive quarters of contraction, the normal definition of a recession. They had had plans to raise the national sales tax again soon, but now that looks to be delayed. Higher taxes for the populace, free money for the big corporations: it's the latest big thing. And it's not working anywhere.

Venezuela's bond prices have dropped, reflecting that the markets now anticipate an 84% change of default.

And the rest of Latin American seems to be slipping into recession. Argentina and Venezuela will contract, Brazil will have near zero growth. It's looking more and more like the US will be the only functioning economy in 2015.

Haven't heard much about ISIL lately, have you? That's 'cause our highly liberal media isn't interested in telling you that Obama's grand strategy of air attacks and no boots on the ground isn't working. ISIL hasn't lost one square yard of territory. Personally, I don't care about ISIL - let the Saudis and Iranians deal with their own mess. But I don't like the US making big claims then looking impotent. The next president is going to have a steep hill to climb to restore US credibility. Race relations in the US are at levels not seen since the 60s with on-going riots in several cities including New York; Putin says we're entering a new cold war with the US trying to break Russia up like Yugoslavia; Arabia is in flames; Asia is tip-toeing around several potential wars, both currency and shooting. And Obama, the one chosen to bring us all together, has presided over all this. I'd thought Ford and Carter were wasted presidencies - I'd had no idea how low we could sink.

Mostafa Ahmed Awwad was a civilian engineer in the Nuclear Engineering and Planning Department at the Navy's shipyard in Norfolk, Virginia. The 34-year-old Awwad worked at the department since February 2014. One night in September, an Arabic-speaker called Awwad and set up a meeting the next day, where the caller explained that he was an Egyptian intelligence agent. According to a Justice Department press release Awwad was eager to cooperate and claimed it was his intention to utilize his position of trust with the US Navy to obtain military technology for use by the Egyptian government, including but not limited to, the designs of the USS Gerald R. Ford nuclear aircraft carrier." Awwad allegedly set up dead-drops and a system of communication with the person he thought was an Egyptian spy. Awwad provided his handler with "four computer-aided drawings of a US nuclear aircraft carrier downloaded from the Navy Nuclear Propulsion Information system." He allegedly provided photos of blueprints for the vessel, and even explained the best places to strike the carrier in order to sink it. Awwad allegedly brought a handgun to one of his meetings with his contact as well. Since his contact was actually with the FBI, the sting will likely land Awwad a 20-year prison sentence. Awwad was born in Saudi Arabia. 16 of the 19 9-11 terrorists were Saudi. And our president bowed to their king.

Sears is closing an extra 100 stores this year, on top of the previously planned 135. They've lost $6 billion in the last three years. The dominant retailer of most of my life and creator of the all-important Sears Christmas Catalog probably has about two years left.

Sciencey stuff: Global Warming, or Climate Change, or whatever they call it these days, is in serious trouble. Of course this doesn't stop the True Believers from screeching about "climate deniers" and talking about how all scientists agree. None of the people I've seen screeching loudest have any degree in science. Anyway, the UN panel on turning off the 1st world economy climate change is meeting right now, and they have a new presentation showing the average of all the climate models, and then showing there's a simple linear relationship between CO2 and global temperature. One minor problem: have a look at their graph below, it shows a .6c global temperature rise between 2000 and 2014. In fact there's been no rise at all. Not one single climate model can account for the 15+ year pause in warming that we've experienced, and that's even after the fact. No model came even close to predicting it. So now we have inconvenient data; no problem, we just ignore the data and make multi-trillion dollar policy decisions based on the average of lots of defunct computer models. I see this as more proof of the creative God that liberals deny: left to myself, I would never have dreamt up liberals and their complex religion about evolution, global warming, race relations, free immigration and the non-heritability of intelligence. But the God that created flies, mosquitos, rats and fleas saw fit to create liberals too.

Major General Allen Batschelet of US Army Recruiting Command said that the Army is facing significant challenges in recruiting. Only three in ten Americans between the ages of 17 and 24 meet the Army's standards for service due to obesity, moral disqualifications, and an erosion in academic qualification. Reflected in the problem of education, recruits have routinely scored worse on the Armed Services Vocational Aptitude Battery (ASVAB) test. By 2020, according to the general, "that eligibility number could be down to two in ten." The young Dream immigrants who are supposed to restore economic growth in this country mostly aren't even eligible to serve in the Army.

Some have noticed I'm getting more aggressive in my conservative opinions. Sorry. In the last few months many of the news outlets I follow have become much more screechingly liberal, with daily releases about income inequality; illegals in Chicago who work part time at McDonald's and can't afford clothes for their fatherless children; stories about how soon North Carolina's outer banks will be completely submerged and we're not doing anything about it; and reasons why Obama and Pelosi and ObamaCare were right all along and the voters are apparently too stupid to see it. I'm having a reaction to this. After six years of watching our country produce profits only for the top .001%, of becoming an international joke with a foreign policy that can only be described as mindless reactivity, of inventing a system of nearly-free health insurance for the poor that requires huge advertising budgets and still isn't working because the poor learned this year about deductibles and copayments, the nation turned hard right. I can't imagine how this surprised anyone. And I'm rapidly tiring of being told I'm stupid 'cause I don't believe in global warming or trickle-down trillion dollar Wall Street finance or more free handouts for people who can't reliably feed or house themselves yet are still encouraged to have five kids - which kids are supposed to be our nation's future.

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